2012 WAS not a vintage year for listed companies in the oil and gas sector. The UK’s listed ‘majors’, BG Group, BP and Royal Dutch Shell all underperformed the wider market over the calendar year.
A mixture of earnings shortfalls, political issues, concerns over global economic growth and the emergence of extracting oil and gas from shale all influenced the sector’s performance at various periods during 2012.
The price of natural gas, especially in the US, fell as the production of shale gas surged. The boom in shale gas and oil could transform the US energy sector and allow America to be energy self-sufficient in the future. Analysts are already debating whether the US could overtake Saudi Arabia as the world’s top oil producer over the next decade.
Oil is more of a global market than gas and its price has been less affected by the shale revolution. Global events have historically had greater influence over the price of oil, such as the recent sanctions imposed by Western governments over Iran’s nuclear program. This targeted oil exports. Crude oil sales account for around 80% of foreign currency income for Iran and as importers scrambled to find alternative suppliers, the price of oil was pushed higher. This led to Saudi Arabia increasing production to help stabilise the oil price, which despite a very volatile middle of the year, finished 2012 around the US$100 level.
The movement in the price of oil and gas is a significant factor for companies to consider when looking at new drilling and exploration opportunities, as a downturn in price would make many fields unprofitable.
The exploration strategy for BP has been somewhat dictated by its response to the Gulf of Mexico oil spill in April 2010. The group has significantly changed the way it operates since the disaster and has sold non-strategic assets to slim down its portfolio and allow it to focus on large scale projects and introduce new technologies to help improve efficiency. The funds raised have allowed the company to put aside money for the ongoing legal settlements for the disaster as well as allowing the company to increase the dividend it pays to shareholders. BP also sold its stake in the joint Russian venture TNK-BP, which then enabled a tie up with Russian oil giant Rosneft. BP anticipates having the opportunity to invest in the best prospects in Russia through this alliance.
Reported earnings for both BG Group and Royal Dutch Shell came in below expectations over several periods in 2012, as the companies struggled against the macro- economic backdrop as prices and volumes fluctuated. Both groups have laid out growth strategies to focus on improving earnings and cash flows in 2013.
A recovery in each of their share prices is largely in the hands of the management of the three companies and their ability to convince investors that the valuations of the stocks significantly undervalue the earnings, dividends and cash flow growth prospects. However, before considering investing personal circumstances and attitude to investment risk should be considered and appropriate advice sought.
Steven Keppie Steven.Keppie@Brewin.co.uk